Nike Cunningham, an energy analyst, takes a look at the natural gas market and the rapidly growing prices after the weakness the market has been exhibiting for quite a while has finally turned around and become bullish.

Prices for natural gas have been down for a number of years thanks to shale gas drillers that have been generating higher and higher levels of production. However, like the bust the oil market experienced, which has resulted in a supply decline, the natural gas market is experiencing something similar, leading to an adjustment in the market. Furthermore, demand is increasing as an increasing number of gas-based power plants are being put into operation. Thus, the market for gas has become much tighter than it has been for many years.

Before the US boom in oil production, the revolution in shale gas resulted in a significant level of new gas supplies, pushing prices down. Though spot prices for natural gas have always exhibited serious volatility, they have tended to stay below $3 per MMBtu since 2014, and because of these low prices, companies have been more reticent with their plans for drilling and have concentrated a lot more on oil-heavy and liquid-wealthy shale plays.

But something strange happened: instead of the crash in natural gas production that could be expected as companies withdrew their rigs from the field, production actually increased leading to new records being established. This was, in part, due to the significant progress in drilling techniques and technology that allowed companies to spend less money and put in less effort to produce even more gas. Gas production also continued to rise because most natural gas is generated alongside oil. As companies concentrated more and more on shale oil drilling, the natural result was even more gas.

However, as oil prices tanked, so too did the excessive production of gas. The numbers of gas and oil rigs declined significantly and the production of gas in the US began to decline. After hitting a peak in February 2016, at a total production of 92 billion cubic feet/day, production has decreased by 5 percent.

In the meantime, demand continues to rise. Because of so many years of low prices in natural gas, there has been a significant increase in gas adoption in the power industry, leading to a decline of the coal industry and an impressive growth of the number of gas-based power plants being built. In the past, natural gas plants would simply be required to produce more because low prices meant it was cheaper to run a gas plant than a coal plant. However, now we have a completely new generation of gas-based power plants that means demand can only go in one direction and that`s up. These new plants will ensure that there is an overall demand increase and not just one that is cyclical.

For example, in the US, since 2012, there has been an increase in capacity of 25 gigawatts and it`s all gas-based, which has brought the total gas-based electrical capacity up to 448 GW. An extra 11.5 GW will be ordered by the end of the upcoming year. And this is taking place at the same time as utility companies are moving as quickly as they can to close down their coal power plants, of which a larger number are simply no longer viable when gas is so cheap and cheap renewable energy is also on the rise.

Thus, the gas market has seen an increase in demand and a decline in supply, which are the exact ingredients necessary for prices to rise. And this situation is the complete opposite of what analysts were expecting even a few short months ago.

Last winter, the reasonable temperatures resulted in a lower level of demand than was expected and the significant levels of production led to inventories larger than they had been in years. At that point, prices hit a trough that hadn`t been seen for twenty years. It wasn`t difficult to imagine that gas prices would stay in that trough for at least a few more years.

However, this previous summer led to a strange phenomenon, which changed expectations in regards to the price of gas. During summer, inventories usually rise, just before the significant demand increase that winter usually brings. However, this summer, the US experienced only a slight increase in inventory, which shouldn`t be a surprise, considering the decline in production.

However, a lower growth in summer inventories did surprise the market, which has led to the price of natural gas rising, for the first time in almost 2 years, to $3 per MMBtu. Monday`s midday trading saw Henry Hub go up to $3.28, or experience a growth of 2.6%.

The market could become even tighter because these trends aren`t going to disappear  supply is still declining while demand will continue to increase with spikes during winter for heating. Furthermore, inventory levels are dropping back towards average figures so it could be a while before gas drops below $3 per MMBtu again.
The United States Natural Gas Fund, LP (NYSE:UNG) increased by 0.21 percent, or $0.02, reaching $9.38 per share. YTD gains for UNG equate to 7.9%.

us companies company site firm company co company Nike Cunningham, an energy analyst, takes a look at the natural gas market and the rapidly growing prices after the weakness the market has been exhibiting for quite a while has finally turned around and become bullish.

Prices for natural gas have been down for a number of years thanks to shale gas drillers that have been generating higher and higher levels of production. However, like the bust the oil market experienced, which has resulted in a supply decline, the natural gas market is experiencing something similar, leading to an adjustment in the market. Furthermore, demand is increasing as an increasing number of gas-based power plants are being put into operation. Thus, the market for gas has become much tighter than it has been for many years.

Before the US boom in oil production, the revolution in shale gas resulted in a significant level of new gas supplies, pushing prices down. Though spot prices for natural gas have always exhibited serious volatility, they have tended to stay below $3 per MMBtu since 2014, and because of these low prices, companies have been more reticent with their plans for drilling and have concentrated a lot more on oil-heavy and liquid-wealthy shale plays.

But something strange happened: instead of the crash in natural gas production that could be expected as companies withdrew their rigs from the field, production actually increased leading to new records being established. This was, in part, due to the significant progress in drilling techniques and technology that allowed companies to spend less money and put in less effort to produce even more gas. Gas production also continued to rise because most natural gas is generated alongside oil. As companies concentrated more and more on shale oil drilling, the natural result was even more gas.

However, as oil prices tanked, so too did the excessive production of gas. The numbers of gas and oil rigs declined significantly and the production of gas in the US began to decline. After hitting a peak in February 2016, at a total production of 92 billion cubic feet/day, production has decreased by 5 percent.

In the meantime, demand continues to rise. Because of so many years of low prices in natural gas, there has been a significant increase in gas adoption in the power industry, leading to a decline of the coal industry and an impressive growth of the number of gas-based power plants being built. In the past, natural gas plants would simply be required to produce more because low prices meant it was cheaper to run a gas plant than a coal plant. However, now we have a completely new generation of gas-based power plants that means demand can only go in one direction and that`s up. These new plants will ensure that there is an overall demand increase and not just one that is cyclical.

For example, in the US, since 2012, there has been an increase in capacity of 25 gigawatts and it`s all gas-based, which has brought the total gas-based electrical capacity up to 448 GW. An extra 11.5 GW will be ordered by the end of the upcoming year. And this is taking place at the same time as utility companies are moving as quickly as they can to close down their coal power plants, of which a larger number are simply no longer viable when gas is so cheap and cheap renewable energy is also on the rise.

Thus, the gas market has seen an increase in demand and a decline in supply, which are the exact ingredients necessary for prices to rise. And this situation is the complete opposite of what analysts were expecting even a few short months ago.

Last winter, the reasonable temperatures resulted in a lower level of demand than was expected and the significant levels of production led to inventories larger than they had been in years. At that point, prices hit a trough that hadn`t been seen for twenty years. It wasn`t difficult to imagine that gas prices would stay in that trough for at least a few more years.

However, this previous summer led to a strange phenomenon, which changed expectations in regards to the price of gas. During summer, inventories usually rise, just before the significant demand increase that winter usually brings. However, this summer, the US experienced only a slight increase in inventory, which shouldn`t be a surprise, considering the decline in production.

However, a lower growth in summer inventories did surprise the market, which has led to the price of natural gas rising, for the first time in almost 2 years, to $3 per MMBtu. Monday`s midday trading saw Henry Hub go up to $3.28, or experience a growth of 2.6%.

The market could become even tighter because these trends arent going to disappear  supply is still declining while demand will continue to increase with spikes during winter for heating. Furthermore, inventory levels are dropping back towards average figures so it could be a while before gas drops below $3 per MMBtu again.
The United States Natural Gas Fund, LP (NYSE:UNG) increased by 0.21 percent, or $0.02, reaching $9.38 per share. YTD gains for UNG equate to 7.9%.